Does Clearpay Affect My Credit Score?

With the current cost of living problem, the phrase "buy now, pay later" is more appealing than ever to spread expenditures. But, before you choose to pay later at the checkout, it's essential to understand how Clearpay and other similar services can affect your credit score - and your ability to secure a mortgage. 

Buy now, pay later (BNPL) programs allow customers to postpone payment for a purchase and are growing more popular at online checkout. Klarna, Laybuy, and Clearpay are just a few of the companies that allow customers to stretch payments when buying with major stores like Asos.

However, according to a new study, more than two million consumers have hurt their credit ratings by adopting 'buy now, pay later' schemes. So, what is the reality surrounding this shopping method, and should you go for it? We will explain which BNPL programmes affect your credit score, how to determine if you've been affected, and whether Clearpay is a good solution. 

What is BNPL (Buy Now Pay Later)? 

Instead of paying the retailer in full at the till or online checkout with Buy now, pay later, the credit provider pays the retailer instead. Then you'll pay the Buy now, pay later provider in interest-free instalments over a period of time. Or, you can pay it off in one single sum at a later date. It's also known as "point of sale credit." Each scheme is different; some allow you to pay within 30 days, while others offer you up to 12 months.

In recent years, the BNPL industry has gone through the roof.  One in five shoppers used the schemes last year. However, several financial watchdogs have questioned this relatively new method of payment, which is particularly popular with younger shoppers.

The Financial Conduct Authority (FCA) announced on 14 February that it had obtained amendments to potentially unfair and confusing wording in the contracts of BNPL providers Clearpay, Klarna, Laybuy, and Openpay.

Previously, the terms required consumers who returned goods to pay instalments until the BNPL firm received confirmation from the retailer that the goods had been received and/or the BNPL firm would be refunded by the retailer.

The main providers of Buy Now, Pay Later credit are:

  • Clearpay is available at retailers such as M&S, Monsoon, and Boohoo.
  • Klarna, which works with thousands of shops like ASOS, Peloton, Superdry
  • Laybuy, which is available at JD Sports, Lululemon, and Reiss.

Does Clearpay Affect Your Credit Score? 

People are often unaware that using BNPL schemes could hurt your credit score. If you miss a payment and fail to repay what you borrowed, using a credit card, store card, or schemes like Laybuy, Clearpay, or Klarna can damage your credit score.

Missed payments or inability to settle what you owe (known as defaulting) can be reported onto your credit report and stay there for six years. This information will be visible to lenders, which could make it difficult for you to get future credit, such as a loan or mortgage.

The impact is determined by criteria such as if you are late or miss payments, and whether debt collectors are brought in. It also varies according to whether your finance provider communicates client payment information with credit reference agencies; some do, while others do not.

The government declared in June 2022 that it will tighten the criteria governing BNPL schemes. While such modifications may not be implemented until 2024, certain BNPL providers, such as Klarna and Laybuy, are already ahead of the curve and are already sharing information with credit reference bureaux. Let's take a closer look at what this implies for your credit score.

When you apply for credit like a mortgage, the finance provider will request information from one or more credit reference bureaus in order to make a decision. A strong credit score boosts your chances of getting a mortgage, but a negative credit score can result in a rejected application or higher mortgage rates.

In the United Kingdom, there are three major credit reference agencies: Experian, Equifax, and TransUnion. And they each generate a report that portrays a picture of your credit management skills. This is summed up by a single number: your credit score. Your credit score is crucial since it determines whether you can get a phone contract and the interest rate you pay.

Does Clearpay Increase Credit Score? 

So, if you make all of your payments on time, does Clearpay improve credit score

No, because it does not share repayment information with credit agencies. In the United Kingdom, Laybuy shares repayment information with the credit reference bureau Experian. So, if you satisfy all of your Laybuy repayments, you can improve your credit score. Similarly, Klarna shares information with credit bureaus Experian and TransUnion. As we explained above, while Klarna claims that this will not damage your credit rating, finance providers will be able to check whether you have been making all of your repayments.

What to Look Out For With BNPL

If you want to use Klarna or Clearpay, they will just perform a 'soft' credit check on you. Soft searches are invisible to other lenders and have no effect on your credit rating or any future loan applications.

When you sign up with Laybuy, though, they will perform a hard credit check. This will be reflected in your credit score. Lenders are concerned when they see a lot of hard searches on your credit report since it appears that you are too eager for credit.

When your BNPL provider sends your repayment information to a credit reference bureau and you fail to make a payment, it will be reflected on your credit report. However, even if your supplier does not submit your information to credit reference organisations, your credit score may suffer as a result. If you do not repay money owed to a BNPL provider, this could refer your case to a debt collection company in order to recover the funds.

Debt collection organisations' credit checks have a particularly damaging impact on your credit rating. Defaults on your credit report might also be marked by debt collection agencies. These can have a significant effect on your credit rating and your financial situation.

Want more credit score help? Check out the Carmoola blog! 😊